View of the German NUG

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BIC 8 Implications on the German market
T2S auto/client-collateralisation and close-links
Arno Friederich
Background of this presentation
• Bundesbank has held a workshop for its market on the 19 November 2013
regarding
• T2S auto-collateralisation and T2S client-collateralisation (including
account setup in T2S (BIC8/11)) and
• Close-links.
• Participants were asked to present their views on the different topics
• Bundesbank announced that it will use the input given for its
presentation on the 29 November 2013
• A written consultation was launched afterwards for the full German
market
• Smaller banks were less concerned since this afflicts banks with a
larger account setup
 There is a single market view
Arno Friederich
13 April 2015
Page 2
Requirements of custodians and transaction banks
•
Current business models of custodian banks and transaction banks active
domestic or in multiple T2S markets via branches and subsidiaries imply the
following requirements given their current BIC codes:
1.
2.
3.
4.
•
Payment banks need to be able to monitor credit limits/ exposures via secondary CMBs in
a so-called custodian model given the current BIC codes used for T2S Securities
Accounts (SAC).
Custodian banks with branches/ subsidiaries in several T2S markets require that T2S
SACs of a branch/ business division not sharing the same BIC 8 code as the Dedicated
Cash Account (DCA) holder, the payment bank, would need to benefit from autocollateralisation, and hence the SAC with a different BIC8 can be linked to the primary
CMB as well.
A transaction bank’s business model implies the need to link the SAC account to a DCA,
both held by separate legal entities and hence different BIC8. The SAC should be linked
to the primary CMB of the DCA in order to use auto-collateralisation.
Flexible linkage of SACs to primary or secondary CMBs depending on the different
business needs and the most cost efficient setup.
The restrictions imposed by T2S on the configuration of the primary CMB
setup definitely limits setup choices for custodians and transaction banks
when using their current BIC8 codes as most of the above mentioned
business cases are not feasible.
Arno Friederich
13 April 2015
Page 3
Example for a Bank’s requirements for SAC-DCA Setup
Currently not possible, workaround required
Bank X SAC
BANXFRPP123
+ ESESFRPPXXX
Bank X SAC
BANXDEFFXXX
+ DAKVDEFFXXX
Primary
CMB
Bank Y (subs) SAC
BANYESMMXXX
+ IBRCESMMXXX
Bank X SAC
BANXDEFFCUS
+ DAKVDEFFXXX
Secondary
CMB1
Bank X branch SAC
BANXBESMMCUS
+ IBRCESMMXXX
Bank X SAC
BANXDEFFCUS
+ MOTIITMMXXX
Bank X SAC re Client A
BANXDEFFXXA
+ DAKVDEFFXXX
Secondary
CMB2
Bank X SAC re Client B
BANXDEFFXXB
+ DAKVDEFFXXX
Secondary
CMB3
Bank X SAC re Client C
BANXDEFFXXC
+ ESESFRPPXXX
Secondary
CMB4
Client D SAC
BANDDEFFXXX
+ DAKVDEFFXXX
Secondary
CMB5
Bank X SAC re Client E
BANXDEFFXXE
+ DAKVDEFFXXX
Primary
CMB
Arno Friederich
13 April 2015
Page 4
Bank X DCA
Bank X T2 a/c
BANXDEFFXXX
+ MARKDEFFXXX
BANXDEFFXXX
+ MARKDEFFXXX
Bank X requirements BIC code/ CMB
allocation:
— Different BIC 8 codes need to be linked to
the same primary CMB
— BIC 8 codes of DCA and SAC for primary
CMB differ, but same legal entity
— BIC 8 codes of DCA and SAC for primary
CMB differ, due to two different legal
entities (transaction bank model)
— Different SACs with same BIC code to be
linked to primary and secondary CMB
— SACs held with different CSDs to be linked
to same CMB/ DCA
— Certain SACs linked to separate CMBs (for
segregated accounts and clients‘ own CSD
accounts)
 Not possible according to current T2S
BIC code/ primary CMB restrictions
Bank E DCA
Bank E T2 a/c
BANEDEFFXXX
+ MARKDEFFXXX
BANEDEFFXXX
+ MARKDEFFXXX
Potential workaround solutions identified by German banks
•
Two potential workarounds have been identified:
1. Open additional DCAs for liquidity management of specific
clients

2.
Eliminates liquidity pooling on a single DCA and is diametrically opposed to
the idea of T2S
Change of BIC8-codes to identify the CSD T2S party:
a.
Use client BIC8 codes for legal SACs of the custodian/ transaction bank
(T2SCC)
b.
Allocate the BIC8 of the parent company to braches and subsidiaries
(T2SAC)
c.
Apply for a new BIC8 code (e.g. a “connected” or “non-connected” BIC code
which is then allocated to all SACs linked to CMBs of the DCA).
In all cases the technical sender could use a different connected BIC8 e.g.
“BANKDEFF” for messaging in the SWIFT network
•
Given the current BIC8 constraints for primary CMBs, these
workarounds would force market participants (1) not to pool liquidity
in a single DCA or (2) to change their BIC code setup due to coding
as foreseen in the T2S-documentation.
Arno Friederich
13 April 2015
Page 5
Drawbacks of the workarounds according to German banks
•
•
•
•
•
•
•
•
•
•
•
Banks may be forced to use several DCAs and hence cannot benefit from cash
pooling on a single DCA
Banks are forced to change their current BIC code setup
Significant operational burden/ costs for banks for application of new BIC codes,
change of static data and information of counterparties
Change of CSD static data is required
SWIFT costs of a new BIC8/ related BIC11 codes and time of availability (all bank
requests coming at the same time depending on migration wave?), SWIFT approval
required
All T2S CSDs need to accept this special use of BIC codes, response is pending
No distinct mapping of BIC8 codes to legal entities/ account owners
Potential liability issues and low acceptance in light of regulatory transparency
requirements
Discrimination of business models of custodians and transaction banks
Market participants pay for the development costs of the CMB functionality via the
T2S fees but cannot utilize it adequately due to coding as foreseen in the T2Sdocumentation
Additional T2S fees (e.g. client collateralisation) in the absence of a flexible BICCMB setup
Arno Friederich
13 April 2015
Page 6
Requirements of German custodians and transaction banks
• Support CR 429 for implementation in the first T2S release.
• At least it should be implemented for a second release, any time later is
not acceptable
• Due to possible future mergers and acquisitions implementation of CR
is necessary.
• The then implemented workaround-solution account setup might be
kept (partially) due to high implementation costs.
=> implemented CR 429 would
• completely remove the restrictions on BICs for CMBs,
• provide sufficient flexibility to support the needs of all market
participants in their respective business models,
• allow full cash-pooling, one of the major advantages of T2S, without
restrictions.
Arno Friederich
13 April 2015
Page 7
Close-links database in T2S
Impact of BIC 8/11 issue
Arno Friederich
13 April 2015
Page 8
Current Situation regarding close-links in T2S
• Close-links in T2S have to entered in an ISIN-BIC11 combination
• The ISIN has to have a close-link to or is directly issued by the relevant
CSD participant identified by the BIC11 in T2S
• Close-link data entered by any NCB is applied to every other NCB and
payment bank
• Payment banks are technically not able to enter close-link data or use
an individual close-link database
 There is no close-link database usage envisaged until the second release
Arno Friederich
13 April 2015
Page 9
Possible change request
For a future use, by either the NCBs for T2S auto-collateralisation or the
payment banks for T2S client-collateralisation a change request is necessary
and was already requested by the Italian NUG
• The German market supports in general such a change request
• The change request is requested for the second release of T2S
• The German market needs to be consulted on the technical details of the
proposed change request so market needs are adequately addressed
• Payment banks need to be able to address their clients correctly
Arno Friederich
13 April 2015
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BIC 8/11 implications
• The workaround solutions might force banks to apply numerous BICs to
their SACs
• This applies especially to those wanting to offer T2S clientcollateralisation
 This might lead to a situation where a single legal entity has numerous
CSD participants in T2S to be able to implement their necessary account
setup
 Same applies for clients of payment banks
• In this case Bundesbank would need to enter for one close-link of one
ISIN and one legal entity several ISIN-BIC combinations in T2S
• There would be the need for a detailed monitoring which BICs (nonconnected, connected, BICs of clients) are used on the CSDs side for
which legal entity
• Payment banks would need to follow a similar approach
Arno Friederich
13 April 2015
Page 11